Pretax deductions provide a savings on your annual returns. Deductions from your wages used to pay for your employer-sponsored benefits reduce your income and are excluded from taxes. In many cases, pretax deductions are exempt from Medicare tax; however, this isn’t always the case. The deduction counts as Medicare wages only if it is subject to Medicare tax.
Inclusions and Exclusions
Whether pretax deductions count as Medicare wages depends on the type of deduction. Pretax benefits include those offered under a cafeteria -- or Section 125 -- plan, such as medical, dental, vision, life, accident and disability insurance; and flexible spending accounts such as dependent care, and health savings and adoption assistance reimbursement accounts. Also, qualified retirement contributions, transportation expenses and educational assistance may be pretax deductions. Most of these benefits are exempt from Medicare tax, except for adoption assistance, retirement contributions, and life insurance premiums on coverage that exceeds $50,000. Also, amounts you receive for educational assistance under your employer’s program earn you a pretax deduction; up to $5,250 annually is exempt from Medicare tax, as of 2012.
If a pretax deduction is excluded from Medicare tax, subtract it from your gross wages before subtracting the tax. For example, if you earn $2,000 semi-monthly and pay $100 toward your pretax health insurance plan, subtract $100 from $2,000 to get $1,900, which is subject to Medicare tax. If the deduction was taxable, your entire gross pay of $2,000 would be subject to taxation. As of 2012, calculate Medicare tax at 1.45 percent of your taxable wages.
Your employer puts your annual Medicare wages in Box 5 of your W-2 and Medicare tax withheld for the year in Box 6. The amount shown in Box 5 does not include pretax deductions which are exempt from Medicare tax. Your last pay stub for the year may show a different year-to-date amount for Medicare wages than your W-2. In this case, add your pretax deductions which are exempt from Medicare tax to the amount shown in Box 5 of your W-2. The result should equal the amount shown on your last paycheck stub for the year.
Pretax deductions that are excluded from Medicare tax are typically exempt from Social Security tax as well. Your Medicare wages are usually the same as your Social Security wages except that Social Security tax has an annual wage limit and Medicare tax has none.
- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
- IRS.gov: 401(k) Resource Guide - Plan Sponsors - 401(k) Plan Overview
- ASI Flex: Pre-Tax Commuter Benefit Program
- Patriot Software: A Look at Qualified Pre-Tax Deductions
- IRS.gov: Publication 15-B
- Patriot Software: What are Taxable Wages?
- University of Delaware: Pay Stub View
- IRS.gov: W-2 Form